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Closing the Emissions Gap: Germany’s Climate Policy Options in the Power Sector

Germany is likely to miss its carbon reduction target for the power sector of 207 mtCO2e per year in 2030 by approximately 60 mtCO2e if it continues on its current trajectory. Given the overriding importance played by national policy in decarbonisation to 2030 and the fact that coal is at the centre of the debate, Germany now has three options to narrow this gap until 2030:

Coal phase-out

Fast coal phase-out by 2040

Slower coal phase-out by 2045

Carbon price floor rising to 39 EUR/tCO2 in 2030

Further CHP support to raise the CHP share of thermal production to 70% in 2030

This report discusses the effects that these three options will have on the German power sector. In particular, it provides an in-depth analysis of the fast coal phase-out scenario starting in 2017:

Size and timing of plant closures

Shifts in import and export balances

Spillover effects

Required size and costs of capacity reserve to secure supply security at European standards

Finally, this report also discusses the financial impact of the fast coal phase-out on the generation portfolios. Medium-term profits will tend to rise for those plants remaining in the market, as they will be able to profit from higher prices. The main winners are likely to be highly-efficient coal and CCGT plants. The financial impact at the aggregate level is limited for lignite and coal, while the gas fleet benefits considerably from this change in climate policy.

Commodity prices drive the size and structure of the energy industry perhaps more than any other factor. Long-term commodity price expectations have fallen dramatically across the energy market, and strategies and policies are evolving consistent with these new beliefs. More than $200 billion worth of oil and natural gas assets are currently for sale globally. Coal-to-gas switching in power, which becomes more attractive with falling commodity prices, is firmly on the political agenda in Europe and the US.

In October 2014, EU leaders agreed on common climate and energy targets for 2030. These included a 40% reduction in GHG emissions relative to 1990 levels, along with targets for renewables deployment and energy efficiency. However, Europe’s main decarbonisation instrument, the EU ETS Phase III, is well out of step with her stated ambitions. The 20% reduction in GHG emissions by 2020 should easily be achieved. However, the 2030 target requires credible commitment to much more stringent policies, particularly in power, where the economics dictate much of the emission reduction burden should be borne.

Natural gas markets are growing fast on a global level, with more players, increasingly complex rules and mechanisms, and rising global connectivity. In this global context, Europe sits in a unique position, with an escalating import dependency and an ever growing number of suppliers. Increasingly difficult upstream financing, highly political infrastructure developments, and the intricate evolution of gas-for-power demand will drive the future of the European gas market.